Bumpy road ahead for global economic recovery
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The fourth Group of 20 summit concluded in Toronto on Sunday with agreements among major economies on a set of targets for fiscal consolidation, however, significant difficulties remain in achieving a sustainable recovery of the world economy.
The first difficulty is when to end the stimulus. Before the summit, the U.S. and Europe were divided on this issue – the U.S. and Germany in particular. Japan and Canada took the European position, and the U.S. softened its stance to avoid disrupting the cooperative efforts.
Concerns on inflation and deflation have troubled leaders at the summit and highlighted a topic: how fast should the government reduce its expenditures in such an uncertain global economy? Also, what should be the pace in ending the stimulus?
The US government warns that an abrupt halt of the stimulus would lead to another recession. Supporting the Obama administration in his column in the New York Times on June 27, Paul Krugman, a Nobel Prize winner for economics, believes some fiscal tightening policies by some European countries would lead to a third depression. According to Krugman, long-term fiscal responsibility is vital, but belt-tightening policies will trigger deflation and threaten a major depression.
However, European countries have their own considerations. After a lengthy period of deliberation and negotiation, Germany agreed to help Greece. But if Spain, Ireland, Italy, Portugal and even Hungary follow Greece into a sovereign debt crisis, it would be difficult for Germany to provide assistance. The unfavorable situation causes Eurozone countries to adopt conservative measures, even though it could sacrifice economic growth. The European method places new pressure on the five-year US plan to double its exports.
The second difficulty is coordination of action. With the financial crisis fading, more countries are considering ending the stimulus. It would be perfect if all the G20 members could implement measures simultaneously. Yet ending the stimulus is risky. The sudden halt of stimulus expenditures would damage the fragile momentum of global economic recovery. The U.S. hopes other countries will end the stimulus steadily and gradually, and both China and the U.S. have emphasized each country should tailor policies to its own situation.
The G20 structure is needed to coordinate positions and steps. In Toronto, members have agreed that an over-tightened fiscal policy would lead to another recession.
Also cited at the summit was the quality of capital.
"The amount of capital will be significantly higher and the quality of capital will be significantly improved when the new reforms are fully implemented."
That means the bubble formed from a substantial amount of low-quality capital.
As a safeguarding strategy, G20 countries have promised sufficient capital for banks to enable them to withstand the stresses of the ongoing financial turbulence.
The G20 summit has played a role in enhancing communication and cooperation on some actions, but it didn't settle the debate of what's the greater threat, inflation or deflation? And despite good intentions, the summit couldn't close divergence among member countries. Furthermore, protectionism adds fuel to economic conundrum. Countries need to set examples by their own deeds.
The author is a columnist with China.org.cn. For more information please visit:
http://www.keyanhelp.cn/opinion/node_7077605.htm
(The article was translated by Li Shen.)
